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The Burgers Aren't All Right

Burger King's results are less appetizing than they look.

You can't judge a burger chain's report by its wrapper. Though it looks hot, juicy, and flame-broiled at first, a few bites reveal that Burger King's (NYSE:BKC) fiscal second-quarter report isn't as tasty as it seems.

Sure, revenue rose 2%, to $645.4 million -- but the top line would've dipped if not for favorable currency translations. Global comps actually fell by 2%, with a sharper 3.3% drop in stateside and Canadian restaurants. Expansion, primarily abroad, helped boost the revenue comparison, but this company's not humming along at the same healthy pace as larger rival McDonald's(NYSE:MCD).

The one thing for which we should applaud BK is its ability to boost margins in this difficult discounting climate. The country's second-largest burger chain saw its quarterly profit rise 12%, to $0.37 a share. Again, favorable foreign exchange fluctuations helped inflate the Whopper-flipper's performance. Earnings would have grown at only half of the reported rate without the currency tailwinds, but the adjusted $0.35-a-share showing was still enough to narrowly beat Wall Street's expectations of $0.34 a share in net income.

To analysts last month, the burger chain wasn't as sweet as its new funnel-cake sticks. Credit Suisse, Oppenheimer, and Deutsche Bank all downgraded the stock in January.

This morning's report isn't likely to change their minds. Burger King's streak of 21 consecutive quarters of positive worldwide comps ended in the final quarter of fiscal 2009. The current $1 promotion on double cheeseburgers -- which has provoked grumbling among many BK franchisees -- won't boost average sales. Making up the markdown in volume is also harder, since McDonald's and Wendy's/Arby’s(NYSE:WEN) have similar deals on their menus.

With roughly 90% of its 12,000 restaurants owned and operated by third parties, Burger King can scarcely afford to upset its franchisees. The louder that frustrated restaurant owners complain about the store-level impact of burgers-for-a-buck, the harder it may be for BK to recruit folks for new franchises.

A return to positive comps would naturally help. During the same three months, McDonald's managed to squeak out positive stateside results at the unit level, on its way to a 2.3% uptick in comps globally.

Pricier quick-service chains are also holding up better than the King. Panera Bread Company(NASDAQ:PNRA) delivered an eye-popping 7.4% spike in comps during the same three months. Chipotle Mexican Grill(NYSE:CMG) doesn't report until next week, but if its comps remained firmly positive during the recession, it's only likely to improve now.

In short, the burgermeister doesn't have an excuse. I don't know whether my experiences are typical, but I hit a few different BK locations each month, and more often than not, the Icee machine isn't working. If you're going to bank on an upsell beverage item to boost sales, at least make sure that it's available. Has anyone ever been turned down for a McFlurry at McDonald's, or a root beer float at Wendy's?

A glance at their selection of side orders also makes it easy to see why BK's rivals can get away with dollar burgers. McDonald's fries are legendary, and Wendy's offers everything from chili to a baked potato as incentives to order combination meals. Without the killer sides, it's no surprise to see BK suffering from a "take the double cheeseburger and run" mindset among folks waving dollar bills in the drive-thru lane.

No one is expecting BK to be a jack of all trades, in the vein of Sonic(NASDAQ:SONC). But clearly, some of its recent shortcomings are self-inflicted.

Longtime Fool contributor Rick Munarriz lives in Burger King's hometown of Miami, and hits "the BK lounge" often. He does not own shares in any of the companies in this story. He is part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Author

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time with more than 20,000 bylines over those 22 years. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he splits his time living in Miami, Florida and Celebration, Florida.
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